Business Expenses

Understanding business expense is super important for any company. It’s all about the money you spend to keep your business running. Think of it as the cost of doing business. Knowing how to handle your business expenses well can save you money, especially on taxes. It also helps you see where your money is going so you can make better choices.

What is Considered a Business Expense?

A business expense is basically any cost you have that helps you run your business. The IRS, the tax people in the US, says these costs must be both “ordinary” and “necessary.” This means:
  • Ordinary: It’s a normal type of cost for businesses like yours.
  • Necessary: It’s helpful and makes sense for your business.
An expense doesn’t have to be something you absolutely can’t live without to be considered necessary. If it helps you, it can be a business expense. For example, paying rent for your office is a business expense. Buying pens and paper is too. Paying your employees is also a big one. According to surveys, paying your team often takes up the largest part of business expenses, maybe even half of all costs! Rent and marketing are usually the next biggest chunks.

Major Types and Categories of Business Expenses

Business expenses aren’t all the same. You can group them into different types to help you understand them better. Here are the main types:
  • Fixed Expenses: These costs are the same every month, no matter how much business you do. Rent and insurance payments are good examples. People often call these “overheads.”
  • Variable Expenses: These costs change depending on how much you use something or how much you sell. If you ship a lot of products, your shipping costs will go up. Utility bills, like electricity, can also change.
  • Periodic Expenses: These costs don’t happen all the time. They might happen once a year or only when something breaks. Fixing a machine or paying a yearly bonus are examples.
It’s really helpful to sort your business expenses into groups, or categories. This makes it easier to track them, figure out your taxes, and see where you can cut costs. Lots of financial guides list many different categories for business expenses. Some list over 30! Here are some common and important categories:
  • Paying for health insurance or retirement plans for your employees. This is a big one and averages about 29.4% of what companies pay their workers in the U.S.
  • Paying rent for your office or building.
  • Spending money on marketing and advertising to get more customers. Some smaller companies spend around 7-8% of their money they make on this. Tech companies might spend even more on things like research!
  • Money spent on looking into new ideas or making products better (Research & Development).
  • Paying for help from experts like lawyers or accountants.
  • Buying things for your office like paper, pens, and ink, and paying for things like internet and phones.
  • Fees your bank charges you.
  • Costs related to company cars or trips you take for work.
  • Paying for meals when you’re meeting with clients or your team.
Putting your costs into these groups helps you make a budget and understand your business’s money better.

Can I Deduct Business Expenses on My Taxes?

Yes, this is a huge reason why tracking business expenses is important! Most ordinary and necessary business expenses can lower your taxes. When you deduct an expense, it means you subtract it from the money your business made before you figure out how much tax you owe. This can save you a lot of money. To be able to deduct an expense, you must have good records. We’ll talk more about records later. Things you can often deduct include:
  • Rent for your workspace
  • Money you pay employees
  • Business insurance
  • Office supplies
  • Utility bills (like power and internet)
  • Paying for ads or marketing
  • Costs from business trips (like plane tickets and hotel rooms)
  • Fees for professional help (like a lawyer or accountant)
  • Meals with clients or people you work with (usually you can only deduct half of the cost)
There are some things you can’t deduct as business expenses. Personal expenses are a big one. You can’t mix your personal spending with your business spending. You can learn more about deducting different types of business expenses by checking out helpful resources, like the IRS Small Business Self-Employed Tax Center. The IRS has videos and information there to help you understand the rules.

How to Track Business Expenses the Right Way

Tracking your business expenses properly is not just good for taxes, it’s essential for knowing how your business is doing. It helps you see where your money is going and how much profit you’re really making. Here are some steps to track your business expenses well:
  1. Keep Business Money Separate: Always use a separate bank account and credit card just for your business. This is the easiest way to keep your personal and business spending from getting mixed up.
  2. Save Everything: Keep all your receipts and invoices. You can use a folder, a shoebox (not the best!). Many people now take pictures of receipts or scan them.
  3. Use Tools: You can track expenses manually using a simple spreadsheet. But using accounting software is much easier and more accurate. Programs like QuickBooks and others help you categorize everything and keep digital copies.
  4. Put Expenses in Categories: Sort every expense into a category like “Rent,” “Supplies,” or “Marketing.” This helps you see spending patterns. Some businesses realized they could cut costs by 25% just by looking closely at categories like marketing and training!
  5. Check Your Accounts: Look at your bank and credit card statements every month. Match them up with the expenses you recorded. Make sure everything matches.
Using automated systems can make tracking much smoother. One retail company used software to handle expense claims from employees. This helped them catch unauthorized spending and saved a lot of time!